Procurement and our KPIs

Most of us working in procurement for a large organisation get new and updated Key Performance Indicators (KPIs) every year. Shaun Stoch, Procurement Management at Maersk Line, often finds himself looking at his KPIs and asking the question: "where does this fit into the value chain and do my KPIs actually improve our product offering?

Digging a little deeper into the literature, Stoch found that the consensus seems to be that many organisations are still working with old procurement models and the real value of procurement is not visible to many executives - there remains a disconnect between procurement KPIs and organisational strategy.

However, he told SmartProcurement that this old mindset is slowly changing.

Many managers make the mistake of not involving executives in KPI selection (1). Marr mentions that senior executives get excited about strategy and the big picture and - as a result - work on strategy, but they delegate the process of identifying or designing the correct KPIs to someone else.

Today, we have a corporate obsession with standardised KPIs, but delivering procurement value is not easy to quantify (2). Procurement value often requires explanation and differs between organisations and their objectives.

It appears that standard corporate KPIs might not be the most effective tools when it comes to measuring the real value procurement adds to an organisation.

A perception that procurement only cuts costs...

Procurement does not only cover reducing cost, but adds value to business performance in aspects of shared concern around risk, sustainability and diversity, and aligning with customer demand (3).

Unfortunately, most of your co-workers don't know this. Many people still think that procurement is a stand-alone, back office function that is concerned only with cutting cost.

A 2014 survey by Tompkins Consortium showed that, of the business leaders participating in that survey, more than 50% considered supply chain to be a standalone business-operating function. This means that the majority did not recognise the need for close alignment between supply chain and general business strategies.

However, there has been a shift in the past decade, ongoing, in the critical nature of the CPO function (4). The value that Chief Procurement Officers (CPOs) bring to the boardroom table is being seen as much more strategic - not only concerned with cost control, but a strategic partner to the business.

Procurement provides a set of strategic business skills, which entails understanding not only where the company is now, but where it will be in five years' time - where the company is being taken regarding its product or service and, importantly, matching the supply chain to that (4).

It is important to understand the level of senior management's strategic involvement in setting KPIs for procurement teams, what the effects of this gap could be and how it can be closed to bring additional value to the organization and its customers as part of the business strategy.

Simply put: does top management involve procurement in strategy planning and do they understand the importance of procurement KPIs in the value chain?

Evolution of procurement

Procurement has partially developed from the age-old function of purely cost saving to a strategic partner. The issue is that it's still in its early phases of development and most organisations are still working with old procurement models.

The real value of procurement is not visible to many executives and this has resulted in missed opportunities and potentially stunted growth. There is still a disconnect between procurement KPIs and organisational strategy, but this is part of an old mindset that is slowly changing.

Shaun would like to find out more. Please participate in his survey. You stand a chance to win a R1000 donation made to a charity of your choice.

(3) Clinton, N (2014). How Procurement Professionals Can Add Value to Business Performance: Some Further Thoughts. Available at: http://spendmatters.com/uk/how-procurement-professionals-can-add-value-to-business-performance-some-further-thoughts/

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